Activation Policies in Australia

1. Activation Policies in Australia by D. Grubb, OECD 5 December 2012 Embargo until 11 December, release date for “Activating Jobseekers: How Australia Does It”

2. A. The big picture

3. Success story • 5% unemployment rate with only a blip through the Global Financial Crisis - an antipodean Germany • (Probably) now lowest rate of working-age income-replacement benefit recipiency (among OECD countries that provide a comprehensive social safety net) • Highest employment rate of the 11 OECD G-20 countries

4. 1. Early History • Australia and UK first countries to develop modern activation ideas (late 80s)(Nordic countries were sometimes quietly applying such ideas as well) • Unemployment benefit for the LTU was replaced by NewstartAllowance, conditional on an “Activity Agreement” in 1991 (earliest broad implementation of the “individual action plan” instrument adopted by most other OECD countries in the mid-1990s or later)

5. 2. The 1990s • Unemployment reached new peaks in 1992 and 1993 then began to fall • “Working Nation” strategy started to curtail LTU by referrals to training and wage-subsidy programmes, and introduced “Contracted Case Managers”, “Jobseeker Screening Instrument” • But in 1997-8 (Howard government) • Cut training and wage-subsidy programmes + Workfor the Dole + MutualObligation + Job Network

6. 3. 2000-2003 • From 1998, all new benefit claimants assessed by the Job Seeker Classification Instrument • This created a national database of jobseeker characteristics – technical basis for Star Ratings = regression-adjusted measures of providers’ placement performance (at site level) • 2nd (2000) and 3rd (2003) JN contracts reallocated business, at the sites with poor Star Ratings, to a different provider • (in 2012) about 2200 sites managed by 100 provider organisations have a Star Rating – it is business at the site level that is reallocated, so the complete closure of a provider organisation is (relatively) rare

7. 4. Active Participation Model/ Employment Services Contract 3 (2003-2009) • APM rolled together the former “Job Matching” and “Intensive Assistance” – so jobseekers had to immediately register with their future long-term provider + Service Fees conditional on jobseeker attendance at interviews + Job Seeker Account funds for measures that “address client barriers” + Contract management – a shift from “black box” to “fishbowl” (contract manager can review – on an audit sample basis - files relating to individual clients)

8. 5. 2009, Job Services Australia + Work for the Dole merged with former Job Network – nowproviders have incentive to manage WfDso as to achieve employment outcomes + Service and Outcome Fees were: • Less-related to unemployment duration, more to JSCI indicators of disadvantage • Reduced for non-disadvantaged clients/increased for disadvantaged clients

9. Sources of impact on unemployment • Mutual Obligation (inc. Work for the Dole) reduced rates of survival into LTU by 20-25% • The average placement performance of the providers retained in 2000 was nearly 25% above the average for all providers at that time • In first year of APM, the inflow of jobseekers to Job Network was far below expected: probably largely a “compliance effect” • These three factors together represent an impact of over 50% on unemployment (plausibly partly offset by “churning” – when person leaves unemployment but later re-registers)

10. The “governance” of reforms • DEEWR was able to implement a strategic vision over many years. Background conditions include: • LMP not split across institutions • Centrelink (a one-stop shop for benefit delivery, another innovation of the 1990s) facilitated the flexible deployment of employment services (i.e. not tightly tied to a particular benefit) • Politicians have tended to both lead and listen, at the right times • Effective parliamentary processes (debates and enquiries) • The employment services industry has become an effective lobby focusing on adjustments that will increase employment outcomes (counterparts in other countries are largely lacking)

11. B. JSA in detail

12. Local organisation and client experience • At a typical urban provider site, a “reverse marketer” (one for each 5 or 6 jobseeker counsellors) finds or creates job vacancies • Semi-skilled or professional workers are not much helped with finding “suitable” jobs (though they may get basic advice and access to job-search facilities) because the focus is on outcomes for disadvantaged clients • JN operations were once described as having much in common with franchising – if the frontline resembles McDonalds, is that bad?

13. Thepublic management framework • Importance of contract management by DEEWR • Centrelink implements JSCI (and JCA/ESAt for more in-depth assessment of severe barriers) and partly monitors later revisions of a jobseeker’s points by the provider • Centrelink only requires clients to actively engage with an employment service provider when they are somewhat job-ready; exemptions are based on: • “Client meets requirements” – c.250 000 people on JSA caseload could meet requirements by working part-time • Long-term barriers (often set out in guidelines, e.g. single parents with 4 children are exempt) • Short-term barriers e.g. illness, family/personal crisis, on a discretionary basis

14. JSA potential improvements • Increase rewards for employment outcomes by non-disadvantaged clients (use Stream 1 Star Ratings to avoid paying for “deadweight”) • In the longer term, track earnings and employment (tax/social insurance records) and consider adding: • stability of employment outcomes • earnings above the cutout point for benefits (but still promote apprenticeship outcomes) • Conduct another broad synthesis evaluation JSA (cf. the JN, APM and WtW evaluations). (This forces tidying-up and publishable presentation of the evidence, e.g. administrative data, and focuses minds on it.)

15. C. Benefit reforms

16. Closure of inactive benefits (1) macro effect on caseload • (from 2003) inactive benefits – for older partners of the unemployed, widows, 60-64 year olds, single and partnered parents with older children, and people with partial work capacity (able to work 15-29 hours) all phased out. • Combined decline in inactive-benefit caseload from the peak (2003 or 2005) to 2011 was c.400 000 - 2.7% of WAP, 4% of labour force • Falling unemployment + growing labour force participation  high employment

17. Closure of inactive benefits (2) micro impact on caseloads • Each time an inactive benefit was closed its target group could claim an unemployment benefit instead, but: • When Partner Allowance was closed less than half the previous monthly inflow was replaced by inflow to Newstart • When Parenting Payments (for parents of older children) were closed, inflows to income support by fell by about half • When people did make a claim, 1-year exit rates were higher (than had been the case with the inactive benefit) • Therefore, inflows to longer-term benefit recipient status were soon several times lower than before the reforms • Why the very large “entry effect”? Employable people expect to be soon placed into a (probably low-level) job if they claim unemployment benefit - they prefer some other outcome (drop their claim or find own employment).

18. Closure of inactive benefits (3) micro impact on employment rates • Evidence slightly indirect and not available for all target groups: • Closure of Mature Age Allowance was fully met by increases in 60-64-year-old male employment rates • The “cross gender effect” from closure of Partner Allowance (this typically meant that the older female partner would no longer qualify for an inactive benefit if the older male partner went onto unemployment benefit) must result from male 45-59-year-olds keeping/finding jobs • Restrictions on Parenting Payment (Single) were 2/3 met by increases in single-parent employment rates • Micro evidence is suggestive that higher employment was the most frequent outcome

19. Macro employment rate trend

20. D.Disability Employment Services (DES)

21. DES (1) Overview • Apart from “sheltered” employment (outside the regular labour market), DES were traditionally: • Vocational rehabilitation for people recovering from industrial injury (Commonwealth Rehabilitation Service, CRS) • Disability “open” employment services (DOES, promoted from the 1980s) , e.g. workplace modifications and ongoing support allowing people with incapacities to take up and continue work in commercial enterprises • Between 2000 and 2015, Australia will have (cautiously and progressively, so as to minimise forced closures) achieved radical institutional change. In 2010, the successors of CRS and DOES were in principle replaced by a unified scheme (although still with two strands).

22. DES (2) Alignment on the JN/JSA model • Historically charities provided sheltered employment; then they became reliant on public funding; and by 2000 there was also block-grant funding of over 200 “open” providers • After early experiments, in the mid-2000s “case based” funding was introduced, based on: (a) assessment of individual incapacity by public authorities (b) tying funding for providers to the individuals served • In the 2010s, DES operate with most of the key feature of JN/JSA: • Clients required to agree Employment Pathway Plan • Providers funded through Service Fees and Outcomes Fees • “Star Rating” of provider performance • (planned 2015) tender process open to new entrants

23. DES (3) Continuing differences from the JN/JSA model • DES expenditure per client c.3 times the JSA level • An Ongoing Support Allowance is paid for already-employed clients based on the assessed cost of keeping them in their job (workplace visits, employer assistance, transport assistance, etc.) • A short-term wage (hiring) subsidy is funded directly by government (additional to any subsidy funded by the provider) • There is no separate fund (JSKA/EPF) for services to address barriers. (DES includes specialist providers dealing with a particular medical condition - the consistent use of funds might be harder to define and monitor as compared to the JSA contract.)

24. DES likely effectiveness • DES is probably effective (as compared with earlier arrangements and many other countries’ arrangements), similar to JSA • There are some risks associated with the high fees for short-hours employment outcomes (i.e.higher incentives for “job splitting” and similar) and the high direct payments to the provider (c.f. in JSA, some of the funding is “quarantined” within the EPF)

25. E. One-slide topics

26. Benefit sanctions • Around 2008,claims that 8-weeksanctions were causing extreme hardship • Easing and additional safeguards (“Comprehensive Compliance Assessment”).. by mid-2010 only 1 benefit reduction was being applied (after warnings etc.) for every 400 JSA appointments not attended • Then provider complaints that they were unable to “engage with” clients and renewed tightening, although sanctions are not often applied to those with a “Vulnerability Indicator” (c.20% of caseload) • Providers typically book appointments fortnightly so as to have more chance of achieving one attendance per month (the requirement to qualify for Service Fee payments) • Most people broadly comply, so the system’s impact depends largely on the participation regime not the sanction regime • The sanction regime is not strict by normal/workplace standards, but for the most-disadvantaged group, an issue is to maintain interaction not stop benefits permanently when behaviour is unacceptable by normal standards

27. Red tape • The 2000 and 2003 reforms retreated from the initial “black box” approach, but by 2008 providers were intensely critical of of reporting requirements and audit controls (“red tape”) • DEEWR contract management work seeks to ensure that payments for providers are for services really delivered according to uniform standards • Retreat from the “black box” approach maybe was necessary: • Occasionally “scams” hit the headlines; many specific areas leave some scope for ongoing “gaming”; consistent treatment of (inevitable) borderline issues is needed to maintain a “level playing field” for competition; • The National Audit Office demands Departmental accountability for the quality of services delivered by contracted providers • Monitoring (e.g. the EPF mechanism) limits windfall profits; • Monitoring helps to ensure accurate reporting of the information that is needed to pay for impact, rather than “gross” employment outcomes

28. Benefit replacement rates • OECD’s model net replacement rates (in an average across selected cases) were 59% in 2001 and 52% in 2010. The fall since the 1993-1997 peak could be 10 percentage points (~20%). • Low benefits probably increase work motivation despite claims to the contrary. Welfare to Work experience provides some hints, but there are no well-known estimates of a general unemployment-benefit elasticity using Australian data. High-end (probably more accurate) international estimates suggest that perhaps 1-1.5 points of the 4-point decline (9% to 5%) in unemployment rates since the 1990s could reflect lower benefits. • Newstart replacement rate has declined because “Allowances” were indexed to prices (whereas “Pensions” were indexed to wages). Arguably reform should stop the decline but only slightly reverse it.

29. Benefit taper rates • Australia applies low benefit taper rates to part-time earnings – 60% for Newstart in most cases, 50% or 40% for single parents (in other countries rates are often 100% above a “free area”) • This fits well with the strategy of promoting part-time employment for several groups (older workers, parenting responsibilities, work-capacity limitations) • The continued payment of some benefit to people working part‑time may be regarded as a type of “in-work” benefit (paid to only about 2% of employed workers) – but one that is only exempt from continuing job-search requirements in relatively tightly-defined and well-monitored circumstances • Low taper rates are only feasible if the replacement rate for people not working at all is kept fairly low

30. ALMPs • In 1997/8 large-scale training and wage-subsidy programmes were formally abolished. “Active” expenditure - as reported to the OECD/Eurostat LMP database - is mainly on the PES. • However, some people initiate a UB claim, sign up for TAFE (or other state-funded) training, and apply to Centrelink/DEEWR for exemption from job-search and related requirements. (In most countries, a short-term unemployed person who enters full-time vocational training can no longer claim UB.) • Up to 1/5 of UB recipients are in training – by international standards this constitutes a type of “labour market” training • This early diversion of UB claims towards training achieves some reduction in “open unemployment”, and helps to increase population skill levels • Also, for JSA providers, entry to apprenticeship (common among adults as well as youths) is a payable outcome

31. The minimum wage • Australia’s federal minimum wage (as a ratio to median earnings) was the highest in the OECD in the 1990s, but it was not entirely enforced: (a) it did not cover all employees; (b) the “casual weighting” on a minimum-wage job could be low (or perhaps not paid) • The current 0.53 ratio is 5th among 19 OECD countries with data • Factors reconciling a high employment rate with relatively high minimum wage include: • Lower minima for under-21s and apprentices • Moderate inequality (universal education, selective immigration) • Benefit tapers and employment policies promote acceptance of part-time job offers • The high minimum wage may help to promote workers’ interest in vocational training (e.g. training is sometimes seen as a route to a full-time/permanent job)

32. Underemployment • In 2010, 7.2% of the labour force was involuntarily in part-time employment, by some distance the highest rate in the OECD. • This could be related to several factors: • High part-time employment - in some countries the involuntary share in part-time work is high, but part-time is uncommon • High minimum wage e.g. employers optimise job offers in terms of hours per week and time of day or use part-time work as a screening device (some European countries, but not Australia, regulate “artificial” recourse to part-time work) • Benefit tapers promote part-time work even when this does not fully meet participation requirements (when job-search obligations continue, the person is officially “underemployed”) • Employment service providers should not engage in overt “job splitting”, but the outcome fees from filling two part-time job vacancies are often higher than for one full-time vacancy

33. Future prospects

34. Employment outcome rates for people with incapacities remain low • For people with partial (15-29 hours/week) work capacity, off-benefit outcomes rates are about 4 times lower than for parents with participation requirements - much higher than before reform, but too low to prevent long-term benefit dependency outcomes • In 1973, the DSP caseload was <150 000 and at first sight the current 800 000 is unnecessarily high: but in 1973, people unable to work were probably often supported by their family (the means test for DSP was not tapered until 1969) • There is some scope for more progress in terms of increasing the employment rate, but partly-incompressible DSP recipiency rates do set a limit

35. Risks and recommendations for Australia • Many OECD countries have achieved 5% unemployment at one point, but only a few have kept it low for several decades (AT, NO, CH). Australia should now aim for that: • Pay some attention to short-term unemployment and rapidly respond to cyclical downturns (e.g. additional funding for training and early placement) as in 2008-09 • Do not copy low-unemployment countries that (when unemployment was low) thought they could casually increase benefits (or perhaps the minimum wage) and ease off on activation arrangements

36. JSA model transferability to other countries • Transfer of the main principles could be relatively easy, and would be effective, for a few countries that have centralised assistance-based benefit systems • Implementation would be complicated where there are: • Wage-related insurance benefits as well as assistance • Multiple overlapping means-tested benefits (e.g. Food Stamps + EITC + Medicaid in the US) • Two or more levels of government responsible for employment policies • If different public employment services or benefit regimes are shifting costs onto each other today, quasi-market provision might do the same more efficiently. Institutional reforms and cooperation arrangements, etc. might able to contain such problems.